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PART THREE: AGGRESSIVE TAX PLANNING AND FISCAL TRANSPARENCY - CONCLUSIONS AND RECOMMENDATIONS

The second aim of this meta-article is to assess whether the measures taken by the selected countries are consistent the standard of fiscal transparency. This paper argues that the surveyed countries need not only to exchange information but also to enhance the standard of fiscal transparency as presented in this paper that includes availability, clarity, simplicity and reliability of the anti-avoidance rules and to improve the relationship between the taxpayers and the tax administration.

It is submitted that the measures taken by the selected countries are not consistent with the standard of fiscal transparency. From the description of the measures taken by the selected countries one may conclude that the implementation of these measures is depending on the use and interpretation of anti-avoidance rules by the tax administration and judiciary. In Brazil, the tax administration has decided to use (without any legal basis) the business purpose doctrine. This is mainly due to the lack of regulation (ordinary law) that is necessary for the implementation of the doctrine of simulation as introduced in the Brazilian Tax Code.

Furthermore, the report of Brazil stated the contradictory decisions given by the

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Administrative Tax Appeals Board (CARF) regarding tax treatment of investment made directly through controlled foreign companies.

In Colombia the scope of application of the anti-avoidance rules of abuse of law and substance over form has been left to the tax administration. The application and interpretation of these rules in Colombia is not clear up till the time of writing. In Uruguay the tax administration has applied the substance over form doctrine to tax avoidance, and also to tax evasion cases which according to one of the reporters of Uruguay is not in accordance with the intention of the legislator when introducing the substance over form doctrine. In South Africa, the tax administration still applies the old avoidance rule even though a new anti-avoidance rule (Section 80A to 80L Income Tax Act) has been introduced in 2006.

The research shows that the tax administrations in the surveyed countries have provided their own interpretation of the anti-avoidance rules. For instance the report of Brazil refers to normative opinions and consulting process; Colombia has interpretative rulings (conceptos) of the provisions introduced in the 2012 Tax Reform; Uruguay has consultations;

and South Africa has advanced tax rulings, non-binding private opinions and certain reportable arrangements.

Despite the existence of anti-avoidance rules and the instruments developed by the tax administration to interpret such rules, there is still uncertainty for the taxpayer regarding the application of anti-avoidance rules by the tax administration. This paper argues that transparency in respect of aggressive tax planning means that anti-avoidance rules should be available and clear for the tax administration to enforce them and for the taxpayer to rely on them. The lack of consistency in the application of anti-avoidance rules (Uruguay), lack of clarity in the use of a new or old anti-avoidance rule (South Africa), the broad scope of interpretation left to the tax administration (Colombia), the use of an anti-avoidance rule without legislative basis and to some extent the lack of reasoning for these instruments (use of business purpose doctrine and consulting process in Brazil) are still problems that need to be addressed by the law makers and the tax administration of the surveyed countries.

The first recommendation is that the anti-avoidance rules need to meet the standard of global fiscal transparency that includes not only exchange of information but also availability, clarity, simplicity and reliability of the anti-avoidance rules. In addition, an enhanced relationship between the taxpayer and the tax administration is recommended.

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From a tax policy perspective, it can be observed that in the surveyed countries, the relationship between taxpayer and tax administration is still hierarchical and that there is a lack of disclosure of aggressive tax planning arrangements except in South Africa (for reportable arrangements). In order to give more certainty to the taxpayer the question will be whether the countries of research should introduce advanced tax rulings whereby the taxpayer and the tax administration agree in the tax treatment of tax planning arrangements. The answer should be yes, but in order to provide these rulings, an enhanced relationship based on mutual trust and legitimate expectations between the taxpayer and the tax administration should exist.

By means of these rulings, the taxpayer may disclose its tax planning arrangements to see whether or not those arrangements could be considered as aggressive tax planning or not.83 The main issue is then that the tax administration may provide its opinion in respect of tax planning arrangements by means of an advanced tax ruling. Moreover, such ruling should be expected to be respected by both parties (taxpayer and tax administration) based also on the principle of mutual trust. In addition, these rulings need to be made available to the public i.e. other taxpayers than the ones involved in the ruling.

In this enhanced relationship the tax consultants should also be taken into account.

Therefore, tax consultants should also offer information regarding their tax advisory activities including whether or not the tax consultants are engaged in tax planning. But for this to happen, the tax administration, the taxpayer, and the tax consultants should develop a new type of relationship. This relationship can be a top down approach e.g. tax audits or filing an income tax return, or a horizontal approach where an agreement can be signed by the tax administration and the taxpayer that results in horizontal monitoring.84 The result should be then a relationship based on mutual trust between the tax administration, taxpayers and tax consultants.

83 The use of rulings has been also argued by Bentley stating that “the proliferation of ruling regimes provides a significant source of assistance to taxpayers in the assessment process, particularly in relation to complex or uncertain areas of the tax law.” D. Bentley . The Rise of ‘Soft Law”in Tax Administration- Good News for Taxpayers?, 1 Asia-Pacific Tax Bulletin, 33 (2008).

84 In this regard, Gribnau argues that in the Netherlands due to horizontal monitoring multinational corporations are moving from aggressive tax planning towards tax risk management and certainty in the Netherlands. For Gribnau, this change of attitude by the multinationals is mainly due to horizontal monitoring that means that, on

“the basis of trust and transparency, the tax authorities are prepared to respond to the multinationals’ need for certainty”. See H. Gribnau, Soft Law and Taxation: The Case of the Netherlands, 3 Legisprudence, 325 (2007).

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It is submitted that the use of advanced tax rulings, horizontal monitoring, and disclosure requirements for all tax planning arrangements can help the tax administration to monitor aggressive tax planning. Furthermore, these instruments can help taxpayers to have more transparency in terms of availability, clarity, and reliability on the tax consequences of their tax planning arrangements.

The second recommendation is regarding the consistent use of the types of exchange of information taking into account the taxpayers’ right by the surveyed countries. All surveyed countries are members of the OECD Global Transparency Forum. In addition Brazil, Colombia and South Africa are parties to the Declaration on the Automatic Exchange of Information in Tax Matters signed on 6th May 2014 in Paris.85 Furthermore, Colombia and South Africa signed a Multilateral Competent Authority Agreement to automatically exchange information based on Art. 6 of the Convention on Mutual Administrative Assistance in Tax Matters on 29th October 2014.86 The main consequence is the commitment of these countries to the Exchange of Information and to meet the standards of Fiscal Transparency of the OECD. However, the use of the types of exchange of information (i.e. automatic, spontaneous and on request) differ among countries. In respect of aggressive tax planning only the reporter of South Africa has stated that the tax administration may resort to spontaneous exchange of information in the case that the country is used for conduit arrangements.

Other countries such as Brazil, Colombia and Uruguay may have included exchange of information in their tax treaties. Nevertheless, the survey shows that the exchange of information for these countries may differ among treaties and among countries. For example the reporter of Uruguay states that the country has specifically excluded automatic or spontaneous exchange in some treaties (i.e. tax treaties concluded by Uruguay with Switzerland and with Liechtenstein).

85 This Declaration has been signed by 48 countries which are committed to the global standard of automatic exchange of information. http://www.oecd.org/mcm/MCM-2014-Declaration-Tax.pdf (Last visited November 2014)

86 The competent authority agreement is a multilateral framework agreement, with the subsequent bilateral exchanges coming into effect between those signatories that file the subsequent notifications under Section 7 of the agreement. The agreement specifies the details of what information will be exchanged and when, as set out in the Standard for Automatic Exchange of Financial Information in Tax Matters. Information available at http://www.oecd.org/tax/exchange-of-tax-information/multilateral-competent-authority-agreement.htm (Last visited November 2014).

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Furthermore, countries should take a position on whether the use of spontaneous exchange of information may be necessary to tackle aggressive tax planning including not only conduit arrangements, but also tax arbitrage, holding companies, etc. The decision should be made taking into account the capacity of the tax administration, the control of the exchange of information including also the protection of confidentiality of the information exchanged, and the cost/benefit analysis when introducing exchange of information provisions either in the domestic law and bilateral tax treaty or by being party to a multilateral exchange of information instrument.

Exchange of information is dealt with in other papers in the framework of the DeStaT project. However, it is safe to argue that in respect of aggressive tax planning, the use of spontaneous exchange of information has not been widespread to all countries and that the countries may also change their position regarding exchange of information taking into account the specific country to which the information should be provided. Furthermore, it is safe to argue that the endorsement by countries of the Common Reporting Standard for Automatic Exchange of Information of Financial Information may result in exchange of bulks of information among countries. The questions will be then: What should be the information that needs to be exchanged automatically? How to prevent the tax administrations of developing countries to be overloaded with information? How to guarantee the confidentiality of the information exchanged? and How to protect the taxpayer’s rights?

Finally, it is submitted that for exchange of information to be effective in preventing aggressive tax planning, changes will need to take place in the surveyed countries. These changes need to be broader than access to the information, but also should include transparent anti-avoidance rules to be applicable to aggressive tax planning in accordance with the standard of fiscal transparency as developed in this paper (i.e. availability, clarity, simplicity and reliability). Finally, the relationship between the taxpayer and tax administration should be enhanced taking into account mutual trust, legitimate expectations and respect for the taxpayer’s rights.